Income Protection Policy Options: Indemnity Value vs Agreed Value

Published: May 22, 2018

Income protection insurance generally provides a monthly benefit of up to 75% of your salary if you are unable to work, for a specified period, due to a sickness or accident.

It’s essential that you understand the difference between an indemnity vs agreed value income protection policy. The option you choose will influence the premium you pay and how your monthly benefit gets calculated. An indemnity policy calculates the benefit on your gross income at the time of a claim, while an agreed value policy calculates your payout at application time.

While both policy types protect your ability to earn an income, it's the application and claim's process that's different. Therefore, understanding how each option works is very important.

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Key Summary:

Which type of income protection insurance do I need?

Life insurance companies in Australia typically offer agreed and indemnity value income protection policies. The type of income protection policy you choose should be based on your:

  • Specific requirements,
  • Employment type: full-time, part-time or self-employed
  • The premium you can afford, and
  • The likelihood of maintaining your income over time.

The amount you’ll receive at claim time depends on whether you chose an agreed value or indemnity value income protection policy. To prevent overinsurance underwriters will assess the financial evidence proving your income and ascertain the amount of cover you can claim.

Income protection indemnity vs agreed value

Differences Indemnity Value Agreed Value
Application process No proof of income needed when you apply. You are required to verify your income when you make a claim. Proof of income is required when you apply to verify the benefit amount you want to be covered.
Benefit payable The payout is based on your income at the time of claiming, usually over the 12 months before lodging a claim. The benefit amount is generally based on your income earned prior application.
Who it suits Employees who earn a regular salary and can easily provide proof of income. People with fluctuating incomes like the self-employed, small business owners and freelancers.
Premium Price Premiums are generally cheaper than agreed policies. Usually, premiums are more expensive than indemnity.
Claims process If your income reduced since you applied, your claim might be paid on the reduced amount. Cover is generally fixed, regardless of any subsequent changes in your income.
Advantage Cover is usually cheaper, and the application process is generally easier. Faster administration of your claim and provides more certainty on the benefit amount payable and faster administration of your claim.
Disadvantage Uncertainty about the monthly benefit you’ll receive. You might be paying premiums for a cover amount you may not be entitled to. Applying for cover may take longer and take more effort because you’ll have to provide financial evidence to justify your income.

What does indemnity value income protection mean?

Indemnity value policies usually refer to income protection insurance that compensates you for the lesser of 75% of your pre-claim earnings, or your monthly amount insured, when you can't work because of an illness or accident. Pre-claim earnings are generally measured as income earned over the last 12 months, or the best 12 months over a specific period, for example, the previous two years.

These policy types do not require you to provide proof of income at the time of your policy application, but only at claim time. Indemnity contracts are usually the most affordable form of income protection because the insured, not the insurer, assumes the risk of any volatility in income. Meaning, any drop in your income will allow the insurance company to reduce the benefits you will receive at claim time.

Indemnity policies may suit employed persons who traditionally receive year-on-year increases in income, so long as this trend is maintained.

What is agreed value income protection insurance?

An agreed value policy is an income protection policy type which generally offers the monthly benefit guaranteed upfront. Which is why you need to provide supporting financial evidence, such as your personal tax returns, profit and loss statements and balance sheet, as proof of income during the application stage. This essentially locks in your monthly benefit for the life of your policy.

The evidence supplied must support this original amount. If the original monthly benefit cannot be supported by financial evidence, this may lead to a reduction in benefit to the actual amount that could have been supported at application time. However, if your income does increase substantially, you can contact your broker or insurer to modify the policy at any time.

An agreed value income protection insurance policy may benefit those whose income fluctuates month to month, like self-employed Australians. It may also be beneficial for women who are likely to have children in the future and plan to take maternity and/or unpaid leave, possibly resulting in a lower income once they re-join the workforce.

These policies are generally more expensive than an indemnity policy as they guarantee your income.

How does agreed value insurance work?

If you’ve determined that an agreed value income protection insurance policy will best suit your unique requirements, you’ll need to:

  • Declare your income and provide proof thereof at application time. Depending on the insurer, you might have to provide 1 or 2 years’ worth of financials to verify your agreed value benefit.
  • Nominate how much you want to receive as an agreed benefit. The amount can be more or less than the income you currently receive. Based on your financials, the insurer will determine whether the amount is justified.
  • Underwriters will assess the amount you've applied for in conjunction with your proof of income
  • The insurer will inform you of your acceptance status and the benefit amount that’s been agreed upon.
  • You’ll pay a premium in exchange for the insurer protecting your income. Premiums will usually be slightly higher than an indemnity policy.
  • No financial proof is required in the event of a claim. If a valid claim has been submitted, you’ll receive the agreed upon benefit amount, regardless of any subsequent rise or fall in your income.

It’s important that you regularly check to see if your cover is still relevant and will be enough to support you and your family should you be unable to work.

Choosing between agreed value vs indemnity value

When choosing between the two types of income protection insurance, agreed value vs indemnity, consider the following:

  • Your income: Is it fluctuating or stable? How stable is your income from one month to the next?
  • Career change: Are you planning to change jobs, take a sabbatical or go on maternity leave?
  • The application and claims process
  • How much can you afford to spend on premiums?

Indemnity Value

Might be a good option if you have a stable income, prefer a cheaper premium and minimal effort during the application process.

Agreed value

Is usually the choice of income protection for self-employed Australians, including business owners, and people working on a contract basis, because they require greater certainty that the benefit amount will pay out.

With Australia having such a diverse workforce, it’s essential that you compare income protection types and carefully consider which one is best suited to your circumstances and will provide you with the best possible outcome.

Frequently asked questions and answers

Can you have agreed value in superannuation?

No, group income insurance held in your superannuation does not allow for agreed value income protection policies, it is restricted to an indemnity value option. The payout you receive at claim time will generally be 75% of your pre-disablement income or the lower of the amount you are covered for if your income as reduced since obtaining your policy. 

What is the difference between an endorsed value policy and agreed value policy?

An endorsed value policy, also known as guaranteed value, is a term select insurers use to refer to an agreed value income protection insurance policy where the financial proof at application time has been reviewed, approved and endorsed by the insurance company. Meaning, your policy meets the income benefit amount that you requested.

You can be assured the contract has been fully underwritten, removing any uncertainty around the benefit to be paid, eliminating a key step in the process, resulting in faster administration of your claim.

While a guaranteed contract and an endorsed agreed contract are largely the same, some endorsed agreed contracts may only provide a partial endorsement. Where this applies, further evidence needs to be supplied at claim time to verify pre-application earnings.

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2 Comments

  • Steve Abbott |

    If self-employed. Is the gross income based on a cash basis or does it take into account income earned during the year chosen, but invoiced and collected in the next accounting period?

    • SPECIALIST
      Anneke Van Aswegen |

      Hi Steve,
      An agreed value income protection policy might be better suited to self-employed individuals whose income tend to fluctuate from month to month.

      By providing proof of income at application time, it allows you and the insurer to agree on the amount you’ll be covered for, effectively locking in a pre-determined monthly benefit and timeframe. So, your cover is usually calculated on your income at the time you apply for your policy.

      The proof of income your insurer generally requires when you’re self-employed, includes:
      • Group certificate
      • Personal tax return
      • Personal tax assessment notice
      • Business profit and loss statement
      • Business balance sheet
      • Business tax return